It is hardly revolutionary to point out that the biggest driver of investment returns is often not performance but cost.
Ask any DFM and they will tell you how they negotiate with asset managers for the best rate possible, using scale to get a better deal for their clients.
Thankfully, however, the era of the ludicrously expensive fund may be coming to an end, as fee pressures bring prices down to a lower and more cohesive average.
Data from Vanguard notes that the average cost of an active fund is now 1.05 per cent, while index funds cost just 21 basis points – a significant drop over the last 12 years.
“Index funds have introduced significant competitive price pressure to the industry, benefitting all investors,” said Stephen Lawrence, head of indexing research at Vanguard.
“While there are plenty of skilled active managers out there, the benefits of their skill can be swallowed up by costs. We believe low-cost funds, active and index, will continue to play an important part in investors’ portfolios, however high-cost funds will not.”
Surprisingly, the issue of cost is equally pertinent to passive funds because there is no variation in active performance. AJ Bell’s latest Manager vs Machine study pointed out that passive investors can achieve better long-term returns by simply switching to a cheaper competitor.
Their study showed the highest cost funds are slowly disappearing, but some remain.
In the sphere of European equity funds they found that the M&G European Index tracker closed its doors in June 2023, because with £80mn in assets the fund was no longer commercially viable – despite charging a princely 50 basis points to follow the market.
But on the flipside, the Halifax UK FTSE 100 Index tracker is soldiering on with an annual management charge of 1.06 per cent – more than 20 times higher than the cheapest alternative, the research found.
Active fees on a passive product is certainly eyebrow-raising, though this is of course one of the rare few funds to do so.
And when it comes to selecting funds for MPS propositions, pricing can make all the difference.
“We need a good reason to understand why we’d access the market,” said William Marshall, CIO at Hymans Robertson Investment Services. “Once we’ve set our strategic asset allocation, you can access markets really cheaply, so our starting point is: tell me why I should access it more expensively.”
For Marshall, this could mean switching out of tracker funds if a new entrant came to market that follows the same process but more cheaply, thus avoiding products like the Halifax dinosaur.
Not too long ago, we did our own analysis on costs to DFMs, and it turns out that they are choosing ever so slightly cheaper funds than the group average in the UK growth, Japan, and Asia ex-Japan regions.
Where they tend to pay more than the sector average is in UK income funds and European funds, too. You can refresh your memory here.
